'Value rally' prompts turbulent week for equities

'Value rally' prompts turbulent week for equities

Global equities had a turbulent week as a result of mixed data on the US economy alongside an indication by the Federal Reserve that it would accelerate the withdrawal of quantitative easing.

This week the S&P 500 is down nearly 2 per cent while the Nasdaq Composite is down just over 4 per cent.

Both slumped after minutes from the Federal Reserve's December meeting were released, showing agreement among policy makers that quantitative easing should be tapered faster, alongside an anticipation of faster rate hikes.

The news hit the US markets more heavily, due to their wider exposure to tech firms which are seen as high growth and attractive due to their long-duration cash flow opportunities, and therefore more vulnerable to interest-rate hikes.

But the turbulence rippled through European markets as well, despite the fact they typically have a higher proportion of value stocks, such as financial services companies and petroleum firms.

The European Stoxx 50 dropped 1.8 per cent on opening on Thursday after the Fed's minutes were released while the FTSE 100 dropped 1 per cent.

However, during trading on Thursday, US equity markets swayed by data released on the American economy showed jobless claims were higher than expected, as well as by ongoing supply chain disruption.

This partially halted the previous tech sell-off and the Nasdaq regained 0.7 per cent.

Quantitative tightening

Geir Lode, head of global equities at Federated Hermes, said: "While Omicron has been the headline grabber throughout the festive period, the choppy start to 2022 was primarily fuelled by a sharp value rally, the strength of which has not been seen since the correction back in June 2020.

"With increasingly hawkish policies and an inevitable Omicron slowdown as we move through Q1, absent a new variant, it may become hard to ignore the attractiveness of the value trade."

David Roberts, head of the Liontrust Global Fixed Income team, said that although “quantitative tightening” (selling some of the bonds it has bought back to the market) was not likely to happen soon, markets were forward looking.

“Three trading sessions into the New Year bond yields have already gapped higher,” he said.

“It's not just boring bonds: see the importance of that across your entire portfolio; the Dow Jones index has outperformed the Nasdaq by 3.5 per cent in three days, Bitcoin tumbled nearly 7 per cent year to date. 

“If markets start to believe the world's central banks are serious about tightening monetary policy, the market moves and rotations of the past few days may be a mere precursor of much more to come.”

The Fed’s move to wind down QE tallies with the decision by the Bank of England in December to raise interest rates.

All-in-all Darius McDermott, managing director of Chelsea Financial Services, said it was a bad time for holding bonds.

“We’re as light as we can be on fixed income already because inflation is there.”

Be prepared for surprises however, he added.